Delta CEO Ed Bastian Says Ancillaries Are Key To Diversifying Revenues

by 
David Kaplan
Thursday, September 19, 2019
 • 
7
 min read

‘Less than 50 percent of our revenues as a corporation come from the main cabin, which is the first time in our business that we’ve had that much diversity,” the Delta CEO told the Skift Global Forum.

Ancillaries still have far to go when it comes to generating revenues for airlines, Delta Air Lines CEO Ed Bastian said during an interview at the Skift Global Forum in New York.

“The diversification of our revenue base is very important to Delta,” Bastian told Skift Airline Weekly Editor Madhu Unnikrishnan. “I was on a morning talk show earlier and people were surprised to learn that we’re a Fortune 100 company – almost $50 billion in revenues. We’ve been in the top quartile of the fastest growing Fortune 100 companies for the past two years.”

The growth of airline revenues in part speaks to the growth of air travel generally, Bastian said. But it’s undeniable that being able to charge baggage fees, seat upgrades, booking insurance, priority boarding, and more are all becoming a significant driving force for carriers’ bottom lines beyond fares.

As Ideaworks/Cartrawler’s Ancillary Yearbook reported [PDF], American Express Delta SkyMiles cardholder spending increased from $45.4 billion in 2012 to $94.7 billion for 2018 – more than double the entire revenue of $42.6 billion produced by Delta during all of last year.

Bastian touted the revenue stream expansion thanks to the airline’s partnership with American Express. But he also pointed to the value from Delta Techops, the company’s third party MRO (maintenance, repair and overhaul) facility in Atlanta. The MRO operation is already a $1 billion business, he said, “and it’s going to double in the next few years.”

The growth of ancillaries also reflects “what we’re doing with premium product – giving people more value rather than relying on the core ticket price,” Bastian added. “Less than 50 percent of our revenues as a corporation come from the main cabin, which is a first time in our business that we’ve had that much diversity.”

And while ancillaries offer an additional enhancement in good times, a la carte sales also offer a cushion when the economy turns downward.

“If we get into a recession, what will it do to our revenue base?” Bastian said. “Clearly, the main cabin is the most price sensitive revenue that we generate. So, being able to generate a diversified source of revenue is important to the airline.”

Delta CEO Ed Bastian talks with Skift Airline Weekly Editor Madhu Unnikrishnan

‘Where’s My Free Wifi?’

One of the themes Bastian and other Delta executives have sought to drive home is that being known for a higher degree of customer service is essential for burnishing the carrier’s image as a brand icon, not simply a “successful airline.”

Among the areas Delta – as well as just about every major airline – hope to conquer within the next year is free wifi. So far, JetBlue is the only U.S. airline offering “gate-to-gate” wifi. Still, given Delta’s larger fleet, it’s not clear when the carrier will be able to catch up. Nevertheless, Bastian pointed to it as a priority.

“I don’t know anyplace other than an airplane that makes you pay for wifi – and the question is ‘Why?’” Bastian conceded.

To which, Skift’s Unnikrishnan put the question: So when am I getting my free wifi?

“We’re working on it,” Bastian said. “We’re working hard to get free wifi with [in-flight wifi platform] Gogo. The issues are technical; it’s not about economics. Once we’re able to turn it on for free, we’re going free. We’re not there yet. I would say that Delta and Gogo working together have dramatically improved the performance of wifi on our planes. We’re adding more broadband to planes. But I’m nervous that if we turned it on now, it might cause [wifi] system outages because it needs to be able to handle an entire plane using their connected devices. And we don’t want that to happen. The only thing worse than slow wifi, is no wifi.”

The Power Of Branding

Unnikrishnan noted that Bastian predecessor, Richard Anderson, who served as Delta’s CEO from 2007 to 2016 before becoming Amtrak’s chief executive in 2017, had started calling Delta “a high-quality industrial company” on earnings calls. “You’ve broadened that focus. How and why?” he asked Bastian.

“It’s really about the evolution of the industry generally and Delta specifically,” Bastian said. “It was 14-years-ago last week that Delta filed for bankruptcy: September 14, 2005. I was the guy in the courtroom; I’ll never forget that day. Considering all the work we’ve done since then, it’s hard to think back that far. But we’ve been working hard toward building the infrastructure and improving the performance of the airline to compete amongst the industrials.

“But as you look at our continued performance and our growth, and the consumer response to what we’re putting out there, there’s no question that we’re mentioned as one of the best consumer brands – not just in the U.S., but throughout the world,” Bastian said.

As for how Bastian believes Delta can achieve a higher status in consumer’s eyes, he noted that roughly 200 million people fly on Delta annually. And with the average flier’s time spent on a Delta flight around three hours, there’s a good deal of opportunity to please that captive audience.

“Think about the consumer interface that we have and the opportunities to continue to enable better preferences, better connectivity, better personalization of service and technology,” Bastian said. “Eventually, we want to be seen as a brand that consumers love, because it has such a positive impact on their lives like other great brands that they love.”

And the translation of “brand love” means that Delta wants to be viewed as as a premium experience that customers are willing to pay extra to be on.

“Customers are increasingly going directly to our website – Delta.com is one of the top e-commerce sites in the country,” Bastian said. “Almost 50 percent of our travel is now booked through Delta.com. So that personalized attention is working. And people are finding the best offers through Delta.com. That’s what it means to be a consumer brand. We’re broader than a ‘transportation company.’ We’re impacting people’s lives more than anyone previously thought possible.”

But the experience is not just what happens in the air. Delta is working “on every part of the booking experience” to enable efficiency, speed, and value for travelers’ money.

“Think about all the airport investments that we’re making,” he said. “We’re trying to create the very best app for our customers that we continue to enhance. Think about what we’ve done with baggage services and people being able to track where it’s going in real-time. Think about our partnerships we’ve created around Delta: there’s American Express and the great commercial co-brand that we share. There’s our partnership with Lyft, where we help people take that last mile to their destination.”

The Airport Of Tomorrow (In 5 Years)

In addition to improving wifi on its planes, Delta is also taking a stronger hand in improving the airports it flies from. In much the same way Bastian expressed frustration with the notion of airlines as simply a mode of transportation as opposed to a source of wonder that can inspire true brand affinity, Bastian lamented airports as crowded, dispiriting bureaucratic warehouses with shopping.

So as part of a wider effort to build its brand, Delta intends to shape as much of the complete flying experience from booking to security to check-in to leaving the airport with its own program.  

“Airports were built for the 1960s,” Bastian said. “In New York, the rebuilding of LaGuardia Airport is one of the biggest in our history. This is something we’re doing on our own balance sheet; this is not something the Port Authority of New York and New Jersey [which operate the airport] are doing for us. As a result of doing it ourselves, we’re going to have a lot more effectiveness in the design and management of that facility going forward.  You’re going to see a streamlined security capability that leverages biometrics and technology where it makes sense.

“In the old world, people came to the airport to marvel at the artworks in the lobby space,” he added. “When was the last time you hung out in the lobby? The first point of entry most consumers want to go through now is the security checkpoint. Think about all the queueing challenges we have because of lack of space. To be able to create a more hospitable, warmer space, to get people to have a better boarding experience. Through technology, there’s an enormous amount we can do to improve amenities. Even lighting can be improved: we can identify cloud movements through light sensors.”

Bastian’s frustration turned to excitement as he talked about the airport infrastructure modernization program being “largely completed” within the next five years.

“It’s not just in LaGuardia, but at JFK in New York, as well as LAX in Los Angeles, Salt Lake City, Minneapolis, Seattle. All this work on the ground will match what we’ve done in the air,” Bastian said.

For Bastian, the affordability and democratization of travel has diminished the “magic” of the experience. Using technology in smarter, more focused ways can bring that thrill back.

The Ultimate Marketing Dilemma

Of course, Bastian also hastened to mention that in addition to airports, the carrier is “investing in the fleet like never before.”

He expects to have at least one-third of Delta’s mainline domestic fleet modernized by next year. The company has launched service on three new aircraft in the last 18 months: the Airbus 350, Airbus 320, and Airbus 330neo.

“We’re going to be launching the Airbus 321neo next year,” Bastian said. “We’ve spent a lot of time trying to see how consumers can realize more value with these aircraft. We’ve brought the price of first class way down to make it affordable both in terms of direct payment and through loyalty rewards. We’ve introduced Delta Premium Select in our international business cabins to give people more comfort on a long trip. We’ve added Comfort Plus that optimizes the space. We want someone who values price or someone who values amenities to feel like they get great value.”

All of these efforts, from wifi to driving brand love all points to solving the problems of airlines and the flying experience largely being viewed as a commodity: it’s all the same except for the price, right?

For example, in-flight entertainment, like wifi is where Delta is fighting for differentiation. The company is attempting to “buck the industry trend” by doubling down on seatback displays, so that travelers can use their personal connected devices while watching the channels Delta offers – “just like they do at home.”

“Airlines face the ultimate marketer’s dilemma: you’ve got 200 people sitting within 40 yards of each other getting the same basic service, but paying price points at all different levels. And they’re all using different currencies,” Bastian said. “We’ve created the opportunity for passengers to use their Delta SkyMiles to purchase more than just trips; they can now purchase items and upgrades through the app. We’ve had a lot of success with that. And that’s why we’re making all these investments.”

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